Wendell\'s Donut Shoppe is investigating the purchase of a new $18,600 donut-mak
ID: 2417082 • Letter: W
Question
Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. (Ignore income taxes.) Requirement 1: What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? (Omit the "$" sign in your response. Requirement 2: Find the internal rate of return promised by the new machine. (Round your answer to two decimal places. Omit the "%" sign in your response.) Requirement 3: In addition to the data given previously, assume that the machine will have a $4,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Round your answer to two decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Answer
Answer 1
Requirement 1: What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? (Omit the "$" sign in your response.
Figures in $
Year
Contribution
Cost saving
Cash inflow
A
B
A+B
1000*1.2
1
1200
3800
5000
2
1200
3800
5000
3
1200
3800
5000
4
1200
3800
5000
5
1200
3800
5000
6
1200
3800
5000
Answer 2
Requirement 2: Find the internal rate of return promised by the new machine. (Round your answer to two decimal places. Omit the "%" sign in your response.)
Internal rate of return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
We have to Find IRR by assuming different discount rates by trial and error method.
Suppose discount rate is 15.64%
Figures in $
Year
Contribution
Cost saving
Purchase of donut making machine
Cash inflow
Disc rate - 15.64%
Net present value
A
B
C
D
E
1000*1.2
A+B+C
D*E
0
0
0
-18600
-18600
1
-18600
1
1200
3800
0
5000
0.864738
4324
2
1200
3800
0
5000
0.747771
3739
3
1200
3800
0
5000
0.646626
3233
4
1200
3800
0
5000
0.559162
2796
5
1200
3800
0
5000
0.483528
2418
6
1200
3800
0
5000
0.418125
2091
Net Present value
0
Internal rate of Return
15.64%
Answer : Internal rate of Return is 15.64%
Answer 3
Requirement 3: In addition to the data given previously, assume that the machine will have a $4,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Round your answer to two decimal places. Omit the "%" sign in your response.)
Internal rate of return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
We have to Find IRR by assuming different discount rates by trial and error method.
Suppose discount rate is 18.805%
Figures in $
Year
Contribution
Cost saving
Purchase of donut making machine
Cash inflow
Disc rate - 18.805%
Net present value
A
B
C
D
E
1000*1.2
A+B+C
D*E
0
0
0
-18600
-18600
1
-18600
1
1200
3800
0
5000
0.841715
4209
2
1200
3800
0
5000
0.708485
3542
3
1200
3800
0
5000
0.596343
2982
4
1200
3800
0
5000
0.501951
2510
5
1200
3800
0
5000
0.4225
2112
6
1200
3800
4125
9125
0.355625
3245
Net Present value
0
Internal rate of Return
18.805%
Answer : Internal rate of Return is 18.805%
Figures in $
Year
Contribution
Cost saving
Cash inflow
A
B
A+B
1000*1.2
1
1200
3800
5000
2
1200
3800
5000
3
1200
3800
5000
4
1200
3800
5000
5
1200
3800
5000
6
1200
3800
5000
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